NEW YORK (The Deal) -- Royal Dutch Shell
has made a £47 billion ($70 billion) stock-and-cash bid for BG Group, taking advantage of a four-year slide in the target's valuation to secure new deep-water oil and gas operations.
Shell will offer 383 pence per share and 0.4454 of a "B" share for each BG share, equating to about 1,367 pence per share, based on Shell's closing price on Tuesday. The offer is 50% higher than BG's Tuesday closing price of 910 pence and the biggest oil sector deal in more than a decade.
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"Bold, strategic moves shape our industry," Shell CEO Ben van Beurden said in a statement. "BG will accelerate Shell's financial growth strategy, particularly in deep-water and liquefied natural gas: two of Shell's growth priorities."
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The deal comes just over a month after BG's new CEO, Helge Lund, took command of the company on March 2. Lund was poached from Norway's Statoil
to head BG, which had been without a permanent CEO for a year after its previous head Chris Finlayson was ushered out in April 2014.
BG's valuation has been languishing near five-year lows for much of this year, following a long slide driven by leadership concerns and a view that its weak capital position means it would struggle to develop promising African leases and early-stage gas and oil projects in Brazil and Australia. BG shares had traded above 1,550 pence in 2011 and early 2012 before tumbling below 800 pence earlier this year as the sharp decline in oil and gas prices further stretched its ability to fund new projects that had, either way, become less attractive due to lower prices.
BG has net debt of about $12 billion, putting the enterprise value of the transaction at $82 billion.
"This offer represents an attractive return for BG shareholders," BG Chairman Andrew Gould said in a statement. "Shell's offer allows us to accelerate and de-risk the delivery" of the company's "strong portfolio of growth assets in Australian and Brazil."
Adding BG to Shell will boost the Anglo-Dutch buyer's proved oil and gas reserves by 25% and will generate pretax synergies of $2.5 billion a year, the companies said.
"For Shell an acquisition to replace reserves makes sense as attempts to join the U.S. shale boom did not deliver much and exploration budgets are being cut," said Christian Stadler, who is associate professor of Strategic Management at England's Warwick Business School.
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Shell has been under pressure to boost reserves as production from its fields has fallen to 17-year lows, while reserves have fallen over the past two years. Van Beurden on Wednesday said his company lacked sufficient exposure to both liquefied natural gas, which is becoming increasingly important as a fuel for electricity utilities, and in Brazil's huge offshore oil fields.
"We would see this as a deal proposed by Shell out of necessity not strength," UBS analysts noted on Thursday. "There is a risk that Shell's portfolio is being marginalized in the current environment."
The deal values BG at 11.5 times its forecast earnings for 2017, compared with a sector average of about 10.9 times, according to UBS. It is the largest oil-sector deal since the merger to create ExxonMobil
in 1999. Shell said the deal will trigger a strategic review of all of its interests and would result in a new wave of asset sales. It is targeting disposals worth about $30 billion from the combined portfolio over the period from 2016 to 2018. Much of the proceeds from those sales will initially be used to pay down debt. The combined companies' pro forma debt in 2014 would have been about 20% of equity and on a pro forma basis would rise further in 2015.
Shell will need about $20 billion of cash to fund the BG deal and will have to borrow more cash to fund capital expenditures. The buyer is likely to have its credit rating downgraded by one or two notches in the short term, according to Shell CFO Simon Henry "The [debt] metrics will come under pressure in the short term," he said in a conference call Wednesday.
From 2017, Shell hopes to shift its focus from reducing debt to share repurchases and has penciled in about $25 billion of buybacks in a bid to wipe out much of the equity it will issue to acquire BG.
The merged company, which will be led by Van Beurden, will be 81% owned by Shell's shareholders. BG shareholders will be allowed to increase either the amount of cash or amount of shares they receive individually, so long as the overall cash-to-share ratio of the offer is maintained.
BG said that its board had agreed to unanimously back the offer, which will need the approval of both BG and shell shareholders. The deal is expected to complete in early 2016.
Shares in BG traded Wednesday morning at 1,255 pence, up 344.6 pence, or 37%, on their Tuesday close. Shell's B shares traded at 2,080, down 128 pence or 5.8%. Royal Dutch Shell's American depositary receipts were changing hands at $60.49, down $1.46, or 2.4%, in premarket trading Wednesday morning.
David Marcus contributed to this report.
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